Want to properly plug the UK’s north-south divide? Look to Germany | Larry Elliott

Britain has been struggling to find a solution to its north-south divide since the staple industries of the first Industrial Revolution – textiles and coal – started to decline in the early 20th century.

It is not a unique problem. Every sizeable country has richer and poorer regions, and from the US rust belt to what was once East Germany, geographical inequality is easy to spot.

Even so, the UK stands out. Measured by national income per head, productivity and disposable income, it is one of the most unequal of the world’s industrial economies and over the past 40 years the north-south divide has grown ever wider.

The story is simple. Parts of the country that relied heavily on manufacturing and coal mining suffered after factory and pit closures, while London and the south-east benefited from the growth in financial services and the City’s pivotal position as a global commercial hub. Past failures to narrow the divide mean Britain is now effectively two countries. There is London with the south-east and there is the rest.

It is little wonder that every prime minister, from Margaret Thatcher to Rishi Sunak, has sought to find a way of closing this gap. Levelling up is merely the latest iteration of this quest, and a recognition that all previous attempts have failed.

That goes for Labour governments as well as Conservative ones. Regional policy under Tony Blair and Gordon Brown amounted to creaming off taxes from the booming financial services and housing sectors in London and the south-east and recycling them into higher public spending in the rest of the country.

Some of this money was well spent. The Building Schools for the Future programme, for example, was a much-needed investment in better learning environments for children in poorer communities. But under New Labour, the loss of jobs in manufacturing jobs continued and private-sector employment growth remained weak. The extent to which the north-south divide had been papered over only really emerged when the coalition government turned off the public sector money tap in 2010.

One of the architects of New Labour – the former Cabinet minister Ed Balls – has co-authored a paper on regional inequality with Anna Stansbury of Massachusetts Institute of Technology and Dan Turner of Harvard. Discussing the paper, Balls admits frankly that Labour could and should have done more to narrow the gap between the regions in its 13 years in power.

The improvements seen to some of the centres of British cities might give the impression that the inequality problem is only a feature of underperforming towns but this is not the case. For their size, places such as Manchester and Birmingham have low productivity and do less well than comparable cities in the rest of Europe.

It’s also worth noting that London and south-east England have pockets of real poverty. Indeed, the gap between rich and poor boroughs of the capital is marked. It is also the case that issues with measurement mean the productivity gap between London and the regions is almost certainly smaller than the official numbers would suggest.

Even so, it would be daft to suggest the UK doesn’t have a big regional inequality gap. The real issue is whether as a country we are prepared to live with the divide or do something about it.

The paper co-authored by Balls draws three main policy conclusions. The first is that where once the regions other than London and the south-east did not have enough graduates, that is no longer the case. What they lack are sufficient graduates with degrees in Stem subjects -science, technology, engineering and maths.

Increasing the supply of Stem graduates is not going to do much for the regions if there is insufficient demand for their skills, so the paper’s second conclusion is that more should be done to redress the imbalance in public funding for R&D.

Unlike Germany, where the poorer regions receive a disproportionate share of government R&D funding, in the UK the money tends to go to the part of the country that is already flourishing – the golden triangle of London, Cambridge and Oxford. If the government is serious about levelling up that needs to change.

As does the share-out of infrastructure spending, the third big handicap identified by the paper. The UK has spent relatively little on transport infrastructure in recent decades and is among the lowest of any OECD country for spending on roads. “What money has been spent, including a recent surge in rail spending, has gone disproportionately to London and the south-east.”

This matters because poor connectivity limits the effective size of city regions. Making it easier for people to interact reduces costs and increases the size of the market.

It would make more sense – if the aim is to get the big regional cities to punch their weight – to invest in better links between them, rather than on improving links to London. An HS3 would be better value for money than HS2.

The message from the paper is that human capital, innovation and infrastructure all matter – and few would dispute any of that. There is, though, a fourth element: demand. Skills, R&D and more reliable trains are all vitally needed to remedy the supply side weaknesses of regional economies, but they also suffer from insufficient spending power.

Germany has recognised this. It is sobering to note that three decades after the economic shock of reunification, the gap between east and west Germany is smaller than that between London and the south-east and the rest of the UK. Germany invested more than £2tn in closing the gap between the eastern and western Länder that opened up during 45 years of communism. That’s real levelling up, not just talking about it.